I came across this video which illustrates the cause of the banking crisis and stock market collapse. I found it very informative and easy to understand with excellent graphics and commentary. Video - Courtesy crisisofcredit.com
As an investor I hope I can always learn from my mistakes and help others. I hope together we can all grow stronger moving forward.
There are many risks when it comes to property investment as a business. I think sometimes people, especially investors forget the steps involved when obtaining a loan and how this process may open them up for risk. There are many concepts to understand mostly because the bottom-line is determined by capitalization (CAP) rates, return on investments (ROIs), and other net operating incomes.
It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.
This opens you up to a different class of loan and areas of predatory lending practices which may incur high fees and other terms or conditions that are not always explained up front. Sometimes loans that allow you to flip properties are called rehab loans as they use hard money via private lenders. This not only means steeper interest rates but an area of lending that is not strictly regulated by the federal or local governments. These hard money loans only work to your benefit when they can get you out of a deal quickly. In other words, these loans only serve the lender because of the amount of leverage that increases the return.
During this time of financial uncertainty as giant powerful cornerstones of the American banking community fail, you have to wonder, is my money safe? What happens if my bank is no longer doing business? Should I take my money out? What about small, regional banks and even credit unions? Are they immune or will they suffer the same fate? Should I worry about my long-term investments? Is it finally time to get organized and figure out my finances?
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice.
Oprah has Suze Orman on her show as a way to elevate the worry but still there are very few answers and still more questions. We can take a moment to answers the questions but you also must keep in mind, the answers are changing for from minute to minute.
How can I tell if my bank will fail? Well you really can't. There's no easy way to know and I'm certain the bank will try to ease your worries. You should look at indications within the market because there is no a hot list of banks going bad. The Federal Deposit Insurance Corp does not publish one. Furthermore, according to the American Bankers Association many banks rebound and recover so quickly that it's next to impossible for them to produce a list.
This current talk of financial bailout suggests that as a result mortgage rates will fall allowing a surge in home buying especially for first time buyers. Still one must wonder how long this will last but also what are the long-term impacts for the housing market? Right now it feels like the lending industry is distressed but this may not be true for very long. The banks at risk of failing just need to time to recover and it will actually be consumer confidence that drive the economy back to being fruitful again.
There just seems to be a lot flux in the market, organizations don't know if they are coming or going. This is a period of acquisition and consolidation. Lehman Brother's is on the auction block, AIG's failure has brought the issue of bailout into the limelight and Bank of America, of course, will remain standing, buying up new pieces for their vast umbrella like Merrill Lynch. This week has been historic and shocking for the experts even to say, they don't know what should happen. That's tough. While so many people grasp this concept, many are putting their ducks in row and wonder if this is a right time to even think about buying a home or new car. I believe people are hesitant this week but this will change once there is direction and leadership toward resolution. This is what some experts have to say about the future of home buying:
How does the latest fallout from Wall Street influence mortgage lending rates? Well, let's take a look. We can only hope. In the interim rates will more than likely go down because there is a lot shuffling going as the dust settles and investors look for safety nets in this uncertain market. Upon many experts advise, this is a time to put our money in real estate investment or income property. As of last week the 10-year notes went down which means that the yield also decrease but this makes for new opportunities. Experts expect mortgage rates to follow this trend because historically they usually follow suit. Expect rates to drop further as more news brakes. Just within the last week Bankrate.com commented that the 30-year fixed rate was 5.78% down from 6.08% of the previous week. Just to compare, this rate was 6.5% in August.
For a while now, many can spectulate the trouble started at the tail end of 2006 with the mortgage industry busy, the American economy has been struggling, facing uncertain times. Many understand the historic significance of last week but the implications of a federal bailout has yet to hit home. With the annoucement that the Federal Reserve will aid the ailing AIG with an $85 billion rescue package, the details seem murkey as more politicians throw in his or her two cents of how this bailout will work and impact the economy. While the bailout does not favor AIG, the company must hand over 80 percent control of the organization's future business dealings, this new bailout and the status of future bailouts remains in the balance and hands of the federal government who stepped into save the mortgage giants Fannie Mae and Freddie Mac not too long ago with a $100 billion package. Where this differs and many fail to see a need to save AIG is that Fannie and Freddie were already government controlled and sponsored by federal dollars. Why should the federal government step in and save a stockholder owned company? What I am trying to say is that this bailout of finance giants has been a popular trend, starting with a $30 billion loan to Bear Stearns in February. It is a trend we will see more of and possibly a part of the Federal Reserve's strategy to save the American economy. I believe many who are struggling to make ends meet, living pay check to pay check, the working class and even the upper class, when push comes to shove and with a cold winter on the way, wish that the Federal Reserve would give the American people a loan. That $300 incentive check just did not cut it.
While AIG must pay the Federal government back or risk losing control of its interests, many are concerned with the level of government involvement and bascially, the bottom line, who really will be paying for the bailouts? Is Washington really to blame for this mess? What about corporate accountability and the management of these organizations? Something is rotten in Denmark as Shakespeare wrote in Hamlet. Really it does not add up. It is cause to worry of how this can be avoided in the future but also how this will impact the American people over the years to come. Many will argue that this has been a long time coming that part of the issue has been a faillure to tighten lending practices and that the subprime market has lead to the downfall of the whole market. Truly companies like Countrywide should have known better instead of living high on the hog. We could have avoided a lot of trouble today with bad loans.
So should the federal government step in and save companies riddled by bad behavior in the market place? This whole crisis begins and ends with the practice of predatory lending and we've known it since before the mortgage buble burst. As said above, not only Countrywide but other banks allowed their lending practices to be too flexible allowing many under qualified borrowers to purchase items like homes and cars. Many brokers pushed such products on people who otherwise should not have been buying in the first place. Many did not look at the full picture and mainly the issue of repayment. Now the market is suffering due to underperforming loans or bad loans. Still the bank is at fault, they should have never allowed such practices to continue but they were leveraging on the risk involved as long as the portfolio was performing well, the bank was making money on subprime products. Now the current situation prevents this demographic of people with blemished credit from establishing any credit and only the prime customers (A & B paper) will prevail. Many will have to learn to live without or forget about keeping up with the Jones because there will just not be any loans out there for these customers. It is unfortnate because this takes aways from sales people's commission salaries and many people of these professional will be out of work. Truly this is why so many people have never believed in the concept of credit in the first place. It creates a vicious cycle.
News flash for all real estate investors looking for the ultimate bargain! Fannie Mae, the nation's largest home mortgage lender, is making it easier to take advantage of "short sales" on houses in risk of foreclosure or already in the proceedings of foreclosure.
For those not familiar with "short sales", let me just say it has nothing to do with a drop in business. "Short" actually refers to the dollar amount at which a property is for sale is less than, or short of the actual value of the property or the outstanding debt on the property. In essence, the property is being sold "short" of the owner's financial goal. In fact, the difference is usually very short of the actual value, which creates the possibility for a very profitable turn for the right investor.
Fannie Mae is taking steps to shorten the process of ridding their portfolio of these types of loans, so a liquidation of the rock-bottom prices on these properties is imminent. This process, at present, is lengthy and can be very involved.
The new law or Hope for Homeowners Act of 2008, signed by President Bush is aimed at attempting to save 400,000 struggling homeowners from foreclosure and possibly losing their homes. The following expands upon exactly what the law entails and who will benefit the most from such legislation. There are many concerns that arise out of the current situation and the actions trying to remedy the problem. The paragraphs below aim to discuss these issues for the American public.
Many are wondering if this law is a little too late. What exactly will it do? Essentially the law allows those who qualify to abandon their existing mortgage but substitute the debt with a 30-year fixed rate loan for a maximum of 90 percent of the home's current value. The Federal Housing Association or FHA will step in and back the loan amounts up to $300 billion worth of bad mortgages. Still the final decision remains with the banks to underwrite the loans because the bottom line is the banks are losing money either way. They take the chance that the existing mortgage will be foreclosed upon, resulting in them owning the property or the other loss is the new mortgage not being as large the existing loan due to housing values dropping substantially over the years. It is a lose-lose situation for the bank but many of them will see this time period as a chance for their portfolios to recover.
This does not mean that every Tom, Dick or Harry and their cousins can qualify or be eligible for the program. There are strict guidelines that must be adhered to. The borrower must be spending more than 31 percent of their housing payment as of March 1, 2008. The existing but distressed loan needs to have been written no later than January 1, 2008, and the borrower must reside in the property. As with any loans, the borrower's income must be documented. Even though this country is facing a lot of economic problems and it is certain many troubled homeowners will be in the bandwagon, this program does not start until October 1st of this year. It will run until 2011. A word of warning however is that FHA, already a burdened government agency, may not be up to full running capacity until after New Year's, to handle this new legislation.
It is also important to consider the fact that your credit will be a deciding factor in this scenario. One option will be to consult your local bank to discuss if this program will even assist your needs or be a benefit to solving a huge problem. It is important that once you realize you are in trouble making mortgage payments, to discuss the matter with the existing mortgage provider. There may be other options and solutions. Ask the customer service representative to put you in touch with the Workout Department.
Like holding your breath underwater, homeowners facing foreclosure are desperate for air. While the solution of coming up and taking a breath seems simple, the work needed to get out of water can be a challenging journey. Many struggling homeowners face the journey of avoiding foreclosure and seek help to prevent it, thus beginning the quest loan workouts and restructuring.
When the pressure of foreclosure begins to mount, the goal becomes as clear as a ray of light on a cloudy day. Fix the loan. It is at this point where the journey becomes a cat-string game, the excitement of lenders dangling the string (loan details, interest rates) over the cats (borrowers) heads and the cat making desperate attempts to grab hold of the string and gain composure once again. Essentially, avoiding foreclosure comes down to numbers and the fact that what is best for the borrowers is often not in the best interest of the lenders.
With that in mind if you are feeling the pressure of foreclosure mounting down on you, the first step you need to take is having a discussion with your lender, sit them down and talk numbers. While with your lender present your financial situation. Show the lender details about your income, where your money is being extended to, and what your family spends on food, clothing, car payments, credit card debt, and student loans. Homeowners also need to present copies of their pay stubs, bank statements, and utility bills to back up their claims. Homeowners will need to make some changes in order to stay in there homes, so say goodbye to premium cable packages and give up your expensive habits because it is time to buckle down.
It makes sense that people overlook the smallest detail when financing a property. It doesn't really matter "why" the loan is needed, if you are seeking a conventional loan from your neighborhood bank or turning to private lenders or hard money; it is still very important that you pay careful attention to the loan you are being offered. I understand you are concerned with flipping the property as quickly as possible; but in doing so you are not as attentive to the type of loan. And thus you find yourself in high-risk situation. Often times brokers may steer you into high-risk deals since they may have pegged you to be a risk-taker.
For months now, the American financial backbone has been a sinking ship, headed toward a crisis beyond anyone's experience and description because not even the Great Depression can compare. Many say we have been in a recession but there have been signs of a Depression for a while. Even such financial leaders like Bear Stearns, IndyMac bank start to fail and powerhouses like Fannie Mae and Freddie Mac need federal assistance; there is something rotten here. This is not to mention the Lehman Brother's bankruptcy and the proposed bailout of $700 billion bailout, which was initiated by American Insurance Group or AIG. No wonder our heads are spinning; we don't know if we are coming or going. Everyday on the news it is something new. People are taking to Internet financial pages like MSN Money and sending emails to financial experts across the country for advice. 
This current talk of financial bailout suggests that as a result mortgage rates will fall allowing a surge in home buying especially for first time buyers. Still one must wonder how long this will last but also what are the long-term impacts for the housing market? Right now it feels like the lending industry is distressed but this may not be true for very long. The banks at risk of failing just need to time to recover and it will actually be consumer confidence that drive the economy back to being fruitful again.
For a while now, many can spectulate the trouble started at the tail end of 2006 with the mortgage industry busy, the American economy has been struggling, facing uncertain times. Many understand the historic significance of last week but the implications of a federal bailout has yet to hit home. With the annoucement that the Federal Reserve will aid the ailing AIG with an $85 billion rescue package, the details seem murkey as more politicians throw in his or her two cents of how this bailout will work and impact the economy. While the bailout does not favor AIG, the company must hand over 80 percent control of the organization's future business dealings, this new bailout and the status of future bailouts remains in the balance and hands of the federal government who stepped into save the mortgage giants Fannie Mae and Freddie Mac not too long ago with a $100 billion package. Where this differs and many fail to see a need to save AIG is that Fannie and Freddie were already government controlled and sponsored by federal dollars. Why should the federal government step in and save a stockholder owned company? What I am trying to say is that this bailout of finance giants has been a popular trend, starting with a $30 billion loan to Bear Stearns in February. It is a trend we will see more of and possibly a part of the Federal Reserve's strategy to save the American economy. I believe many who are struggling to make ends meet, living pay check to pay check, the working class and even the upper class, when push comes to shove and with a cold winter on the way, wish that the Federal Reserve would give the American people a loan. That $300 incentive check just did not cut it.
